Thursday, November 10, 2016

Trump's First 100 Days: No Growth Here

Let's take a look at Trump's proposed economic plan to see if increased growth is in the cards.

In the first 100 days, he's promised two things: trade renegotiation and tax cuts.“We don’t win on trade” was a frequent refrain heard at Trump rallies, and in response, the real estate mogul has said he will renegotiate NAFTA and withdraw from the Trans-Pacific Partnership. He said he will direct his secretary of the treasury to pursue action against Chinese currency manipulation.
Below are 2 charts: the first shows total Canadian and Mexican imports while the second shows Chinese imports:

The top chart is seasonally adjusted while the bottom chart isn't. That's actually an unimportant point. Instead simply note that trade with both countries has risen at a very strong pace for several decades.

Trump wants to renegotiate NAFTA, which creates a huge problem: companies have incorporated NAFTA into their operations for the last 20 years. For example, car companies have already moved plants across the border, as have other manufacturers. As for China, it too has been incorporated into the global value chain; companies have already transferred their facilities and operations to the mainland for a variety of reason. Renegotiating treaties with both won't undo that change; it's already built into the global system.

What it will do is potentially lead to a traded war, where countries begin to increase tariffs on imports as well as adding quotas to imports. This is a very bad idea; in fact, just such a situation (the passage of Smmot Hawley in 1930) greatly exacerbated the Great Depression.

Next, we have taxes:

On taxes, Trump pledged “the biggest tax cut since Ronald Reagan.” The Economic Recovery Tax Act of 1981 and Tax Reform Act of 1986, passed during Reagan’s presidency, simplified the tax code and lowered marginal tax rates by more than 20 percent for most citizens. Trump indicated that he will seek to reduce tax brackets from seven to three and called for business tax rates to be reduced to 15 percent.

Once again, supply side economics enters our political discussion. And it won't work as advertised. Republicans will point to the Reagan tax cut as proof that it does. But what they'll fail to mention is that in the 1980s, the labor force participation rate started to increase, which it continued to do until the late 1990s. This development was primarily responsible for our economic growth in the 80s and 90s. And as our population has aged our growth has slowed. This exact same situation is also occurring in Japan and the EU (they also have agin populations and slower labor force growth; it's a big reason why Germany was so emphatic about letting refugees in). So, unless we start increasing our labor force (by increasing immigration), we're pretty much stuck in Secular Stagnation mode.

Also consider: Kansas implemented supply side tax cuts a few years ago. The results have been disastrous (see this post from Menzie Chen for further information)

And finally, a massive tax cut will increase wealth inequality, which will exacerbate the economic environment that led to Trumpism in the first place.

So, to recap, Trump's policies so far show no increased growth potential. But he could start a debilitating trade war and increase wealth inequality.